Employment Allowance for PAYE Payroll
In the recent budget the government made changes to the employment allowance to take place from April 2025. (Article - https://matrixaccountancyservices.org.uk/news/autumn-budget-2024).
This article will explain how these changes will impact limited companies and sole traders that process PAYE payroll.
What is the Employment Allowance?
The employment allowance is a credit that can be redeemed against employers’ national insurance (NI) contributions.
It is designed to enable small and medium employers to reduce their national insurance costs.
Which businesses can claim Employment Allowance?
Any business that process PAYE payroll and meets any of the following criteria can claim employment allowance;
At least one employee earning above the NI contribution threshold (£6,396 per year in 24-25).
At least two company directors on payroll earning above the NI contribution threshold (£6,396 per year in 24-25).
Total employers NI costs of less than £100,000 per year.
Which businesses are excluded from Employment Allowance?
Limited companies with just one company director on payroll and no employees.
Businesses with employers NI costs of more than £100,000 per year.
How much is the Employment Allowance?
In the 24-25 tax year employment allowance is £5,000 per year, this will increase to £10,500 per year in 25-26.
If any of the employment allowance isn’t utilised, then it resets in the next tax year. The unused credit cannot be carried forward to the next tax year.
Any other changes to be aware of?
In the recent budget the government announced that the payment threshold for employers NI will be reduced from £9,100 per year to £5,000 per year.
Therefore, more employees’ salaries will be eligible for employers NI.
The rate of employers NI will also increase from 13.8% to 15% from 25-26.
What is the impact on limited companies and sole traders?
Sole Traders with annual employers NI costs of less than £10,500 will likely benefit from the changes.
If the employers NI bill is higher than £10,500 then it will depend on the salaries of employees as to whether the changes are a net cost or a net benefit.
Limited Companies with at least two company directors or one employee on PAYE payroll will benefit if total employers NI costs are less than £10,500 per year.
Limited Companies with just one director on PAYE payroll cannot claim employment allowance so will therefore pay more employers NI. For example, a director with a PAYE salary of £12,570 per year would pay an additional £656.64 per year due to the changes.
It should be noted that increased employers NI costs will reduce a companies profits and therefore its corporation tax liability. Potentially, it will also reduce a directors dividend tax liability if less income was withdrawn overall. This would offset some of the increase in employers NI costs.
Any other considerations?
When deciding on the best company structure it is also helpful to take into account other factors such as changes to regulatory compliance.
For example, the upcoming changes to Making Tax Digital for Income Tax (MTD for ITSA) requirements for sole traders and landlords. (Article - https://matrixaccountancyservices.org.uk/news/making-tax-digital-for-self-assessment-mtd-for-itsa-latest-update-for-limited-company-directors-sole-traders-partnerships-and-landlords ).
For further information please contact will@matrixaccountancyservices.com or call 01788 486065.